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Sunday, January 29, 2012

The Double Edge Sword of Public Policy


For years now, I could categorize a majority of policy as nothing but myopic.  The inability to explore all parties involved in policy, is the exact reason that policy will tend to be ineffective.  I like to refer to this as the double edge sword of public policy. 

When your congressman sells a certain economic plan, social plan, or foreign policy plan it is geared to the platforms of his/her party.  Rightfully so, but the ability to communicate the pro’s and con’s of a proposed bill is absolutely necessary to the potential effectiveness of that bill.  The scope and coverage of the federal government is so large, that it only makes sense that the legislation of the federal government would be equally as large.  Considering that Congressional legislation supersedes that of individual states, it is important to understand the effect of that legislation.  For instance, the regulation of interstate commerce will fall into the myopic category when Congress decides to step in for the betterment of the people.  At times, the legislation put forth will be favorable for a small portion of the economy.  Often, this small portion of the economy will be subsidized so it doesn’t disappear altogether.  This is counterintuitive to a capitalistic society.  Economic sectors come and go, it’s the nature of a free market.  Major issues will occur when the government interferes with the conclusion of certain industries in an attempt to preserve a few jobs in a few states.  This allocation of tax revenue to a dying industry does nothing but destroy value and potentially stifle growth for a new industry that was most likely going to replace the dying sector.  So yes, the policy was successful in preserving a few jobs, but by doing so the unintended consequence was that they destroyed the growth of that industries replacement.  Thousands of jobs and millions of dollars of revenue was the unintended result.  So at a time when the government could have chose to let that industry die, and save $10 million in subsidies, they decided to artificially hold up a dying sector and unintentionally gave up the ability to tax a booming new sector.   This is what I mean when I say there is a double edge sword in policy creation.  Both sides of the isle are guilty of picking and choosing economic sectors to preserve, but if the policy being proposed went through a bipartisanship discussion of its effectiveness these type of inefficiencies could be determined before implementation.

I would like to provide real examples of the double edge sword in regards to domestic, foreign, and monetary policy.

Domestic Policy: Extension of Unemployment Benefits

After the spike in unemployment claims during the 2008 recession, the federal government was pressured to extend unemployment benefits for those individuals who continue to struggle to find jobs.  Considering the federal government was responsible for the recession (in my opinion of course), it is only right to provide for the people that were hurt the most.  In America, we can’t have people starving and not being able to provide for their families especially on the scale of unemployment numbers of 10%. 

Intended Goal: To provide for the American families adversely affected by the recent economic downturn that have exhausted their efforts in search for employment. 

Future Unintended consequences: I believe that the spike in unemployment insurance paid by employers will not go down to pre-recession levels.  This pool of tax funds will just be another free for all for unnecessary programs that will further weaken the financial strength of the federal government.  Also, when an employee files for unemployment the employer is hit with a claim.  If you consider now that the benefits will last longer that usual, mathematically the claim will have to be larger.  For small businesses, if they get hit with a few claims at once it could affect the financial sustainability of his/her business. 

 Foreign Policy: Economic Sanctions on Iran

Iran’s persistency to obtain a nuclear weapon is becoming problematic for the western world.  In my opinion, Iran’s aristocracy is the mysterious deviant in the Middle East who is pushing pieces around to test America’s patience.  They are very aggressive with their propaganda, and at times very bold with their “covert” military acts.  Because of this, it raises the question of Iran’s motive and intent for a nuclear weapon.  Is it to stay on par w/ the industrialized nations of the world?  Is the nuclear plant going to power and industrialize Iran to create a more modern economy?  Or is it strictly for military reasons?  These are the questions that make everyone so uncomfortable towards Iran, because we don’t know or understand their motive.  Recently, we have placed economic sanctions on Iran to hinder their ability to finance this program.

Intended Goal:  Impose an arms ban and an almost total economic embargo on Iran, which includes sanctions on companies doing business with Iran, a ban on all Iranian-origin imports, sanctions on Iranian financial institutions, and an almost total ban on selling aircraft or repair parts to Iranian aviation companies.

Unintended Consequences: Our lack of understanding of motive for Iran’s goal of nuclear power is the main source of unintended consequences.  Short term the most material consequence will be the fluctuation of crude oil.  Unrest in the Middle East gives Wall Street and Speculators a reason to drive up the price of crude.  Considering the national average of gas is $3.41 a gallon, we don’t need the fear premium to creep up into the valuation of this important commodity.  Besides the economic consequences, there are humanitarian consequences as well.  Our pattern of intervening in affairs in the Middle East is becoming cumbersome and difficult for the majority of innocent people who inhabit the region.  We are losing support for our interventions, and we are continually making more and more hardships for these people.  Collateral damage from bombings, constant US military presence, and stifling economic conditions due to war are all contributing to resentment towards the United States.  This resentment will continue to provide recruits for terrorist organizations, who then will add there own twist and propaganda to create a new generation of fundamentalists who hate America.  Our foreign policy needs to take this into effect, and we need to take it further than just providing financial aid to these people.  We need to reconsider our approach in the Middle East, and decide if the juice is worth the squeeze.  Are we going to pass legislation based on fear?  Are we going to be responsible for adding a new generation of hatred towards America?  Or are we going to provide leadership and support for this region.  We can’t militarily take a country, and then try to force democracy.  This new form of colonization is ignorant to the regions morals, personality, and culture.  Providing liberty to these nations is what we need to focus on, give them a choice.  Because that is more than what they’ve had before, and let them take advantage of their new found freedom and create a system that changes their government for the better.  Sometimes that answer is democracy, sometimes it isn’t.  So in conclusion, the unintended consequence is that we are creating more dissent in a region because of the lawlessness of the few and the abuse of power by their leaders.

Monetary Policy: Low interest Rates

Intended Goal: Continual access to cheap money, through low interest rates will keep the credit markets open.  This in turn will encourage economic growth and continual consumer consumption.

Unintended Consequences: Personally, I believe there are two unintended consequences of keeping rates low.  First being inflation.  There is enough coverage on inflation right now, and it’s viewed as a necessary evil to keep the credit markets open.  We don’t really have a choice on this one.  The economic recovery (that is still going on) is reliant on an open and at least perceived to be healthy credit market.  More importantly though, the second unintended consequence is the connection between low rates offered by the fed and rates paid on treasuries.  The Federal Reserve rates are the benchmarks for US debt, corporate debt, savings rates, money markets, and all other interest rates in the system.  Meaning if the Fed raises rates, all of the above rates will rise similarly.  Let’s say you own a bond portfolio of treasuries with a YTM of 3%, and the fed raises rates from .25% to 3% then the value of your portfolio will decrease dramatically.  Your treasuries that were paying 3% at a fed rate of .25% are now paying 7% at a fed rate of 3%.  So what that means is that you’re faced with a decision, sell your current portfolio at a loss (because people will pay less than the bonds value because of the low rate offered in comparison to the new rate being offered) or hold to maturity.  So you’re either losing money or losing liquidity.  This presents issues from a foreign and domestic POV.  Retiree’s who weighted their portfolios to fixed income because of the volatility of equities are going to see a significant decline in the value of their retirement fund.  Foreign countries are going to see a significant decline in value of their portfolio of US treasuries (China holds $1.14 trillion in US treasuries).  This puts us in a very difficult position in many facets of foreign policy.  If we are working on a trade deal w/ China that is close to being completed and the Fed raises rates which leads to a loss of $500 billion to the Chinese government.  Then I can assure you those trade negotiations will head south.  The main unintended consequence of keeping low rates is our relations with foreign nations, and our ability to raise rates in the future.  **You will hear more about this issue when our economy gets healthy enough to sustain an increase in rates.  You’ll see that the issue will be global, and not isolated within the borders.

These three examples present the issue with myopic policy that lead to long term problems that are actually larger then the initial reason for the policy.  Partisanship is the main reason for this fast-pass policy.  If you’ve read anything I’ve written before, you know I’m an advocate for bipartisanship.  In this scenario, bipartisanship is the fix to policy geared towards the left or the right.  Each party adds something new and is empathetic for a different class of people.  Policy needs to reflect the diversity of people in the country, and needs to be implemented by leaders that understand and embrace ideas from both sides of the isle. 

Normally, this type of policy exists because it is being pushed through by the majority and attention to detail is not needed or discusses because of the assurance that it will be passed.  Considering the scope and influence of the federal government, it is essential to analyze all sides of the equation to understand the full effect of perhaps a perceived simple and limited bill.  Redefining the discussion and providing a framework in which policy is passed responsibly is the ultimate goal.  Democrats passing legislation in the 90’s which produced unintended consequences prevalent in the mid 2000’s is not acceptable, and Republicans passing legislation in the mid 2000’s that will produce unintended consequences in the years to come is not acceptable as well. 

Bipartisanship is not to add more civility in Washington.  In fact, that is the last of my concerns.  The goal of bipartisanship is to be objective on policy for the future of this country.  It sets the tone, and gives the country the best chance for improvement.  Both parties have a lot to offer, and the only way the largest problems in this country will be solved is by the expertise of everyone in Washington.  Bipartisanship will limit the unintended consequences of policy because of the better understanding of all parties involved, and then adjustments can be made to better form the bill.  There is no reason that the double edged sword of policy can relinquish itself in the future.  We all just need to understand the importance of proper examination of policy proposed by the federal government, and encourage constant improvement of that policy.  A new perspective and dedication towards efficient policy is essential for the long term sustainability of the nation.     

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